Editorial BoardXML

Seoul Journal of Economics - Vol. 12 , No. 2
[Paper List] [Go to Volume List]

[ Article ]
Seoul Journal of Economics - Vol. 12, No. 2, pp. 157-171
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 May 1999
Received Jan 1999 Revised Mar 1999

An Exact Pricing Error of the APT within the Arbitrage Framework
Chang Mo Ahn
Graduate School of Management, Korea Advanced Institute of Science and Technology, 270-43 Cheongryangri-Dong, Dongdaemun-Gu, Seoul, 130-012, Korea

JEL Classification: G12

Abstract

We derive an exact deviation for an individual asset from APT pricing in a finite economy within the arbitrage framework. This deviation is the product of a tradeoff between mean and variance of the efficient arbitrage portfolio, the asset’s idiosyncratic variance and the proportion of this arbitrage portfolio represented by the asset. We show that the deviation becomes negligible in an infinite economy if the efficient portfolio is well diversified.

References
1. Chamberlain, G., and Rothschild, M. “Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets.” Econometrica 51 (September 1983): 1281-304.
2. Connor, G. “A Unified Beta Pricing Theory.” Journal of Economic Theory 34 (December 1984): 13-31.
3. Dybvig, P. “An Explicit Bound on Deviations from APT Pricing in a Finite Economy.” Journal of Financial Economics 12 (December 1983): 483-96.
4. Dybvig, P. and Ross, S. “Yes, The APT is Testable.” Journal of Finance (September 1985): 1173-88.
5. Grinblatt, M., and Titman, S. “Factor Pricing in a Finite Economy.” Journal of Financial Economics 12 (December 1983): 497-507.
6. Huberman, G. “A Simple Approach to Arbitrage Pricing Theory.” Journal of Economic Theory 28 (October 1982): 183-91.
7. Ingersoll, J. “Some Results in the Theory of Arbitrage Pricing.” Journal of Finance 39 (September 1984): 1021-39.
8. Mangasarian, O. Nonlinear Programming. New York: McGraw-Hill, 1969.
9. Roll, R. “A Critique of the Asset Pricing Theory’s Test.” Journal of Financial Economics 4 (May 1977): 129-76.
10. Mangasarian, O. and Ross, S. “An Empirical Investigation of the Arbitrage Pricing Theory.” Journal of Finance 35 (December 1980): 1037-104.
11. Ross, S. “Return, Risk and Arbitrage.” In I. Friend and J. Bicksler (eds.), Risk and Return in Finance. Cambridge, Massachusetts: Ballinger, 1976a.
12. Ross, S. “The Arbitrage Theory of Capital Asset Pricing.” Journal of Economic Theory 13 (December 1976b): 341-60.
13. Ross, S. “The Capital Asset Pricing Model (CAPM), Short-Sale Restrictions and Related Issues.” Journal of Finance 32 (March 1977): 177-83.
14. Shanken, J. “The Arbitrage Pricing Theory: Is It Testable?” Journal of Finance 37 (December 1982): 1129-40.
15. Shanken, J. “Multi-Beta CAPM or Equilibrium-APT?: A Reply.” Journal of Finance 40 (December 1985): 1189-96.
 

Editorial Office, Seoul Journal of Economics, Institute of Economic Research, Seoul National University 599 Gwanangno, Gwanak-gu, Seoul 151-746, Korea
Tel: +82-2-880-5434 | Fax: +82-2-888-4454 | E-mail: sje@plaza.snu.ac.kr
Copyright (c) 2020 SJE. All rights reserved.